NYSE Euronext takes on Libor amid benchmark reforms — but what about Cdor?

Efforts to reform the battered Libor rate moved forward Tuesday as the company that owns the New York Stock Exchange took over responsibility for what may be one of the world’s most important benchmarks, affecting pricing on some US$350-trillion of loans, mortgages and derivatives.

Under the deal, NYSE Euronext will pay just £1 because the U.K. government committee charged with overseeing the tendering process didn’t want the British Bankers Association, the industry association that created Libor back in the mid 1980s, to profit from the sale.

Libor, or the London Interbank Offered Rate, is the rate at which banks lend to one another, and it’s used as a base for calculating the price of countless financial products globally.

Regulators are hoping that bringing in NYSE Euronext will help rebuild confidence in Libor in the wake of revelations that some banks were trying to profit by manipulating the rate.

So far three banks have paid about US$2.6-billion to settle allegations they tried to fix Libor, and more penalties are anticipated. Regulators in Europe, Canada, the United States and other countries are said to be probing a dozen major banks.

For the time being Libor will continue to be calculated by averaging submissions contributed by panels of participating banks. But authorities plan to bolster the process with tougher, more transparent methodology. It is also hoped the reform precess will result in a rate that is more closely linked to actual market transactions than the current system.

As revelations about Libor piled up, the spotlight quickly moved to other similar benchmarks around the world, with national regulators in several countries including Norway, Sweden and Singapore announcing reforms to their benchmark lending rates. Canada may join the list.

“I don’t know where this is all going to shake down,” said Bob Park, chief executive of FINCAD, a leading risk analytics firm in Vancouver with clients around the world. “Some of these rock-solid assumptions that everybody who participates in the market has sort of relied on for decades, that the setting of Libor was impartial, that the rate is true and not subject to manipulation — all these underpinnings of the market have come into disrepute.”

Back in January the Investment Industry Regulatory Organization of Canada acknowledged the Canadian Dealer Offered Rate, known as Cdor, is vulnerable to manipulation. The finding came as part of a review launched in 2012 and prompted by “concerns” raised by the Libor scandal.

Cdor is defined as the rate at which banks lend to corporate borrowers using a bankers acceptance facility. Much like Libor, Cdor is calculated daily from submissions provided by a panel of banks including all the major domestic lenders along with a handful of foreign players including Deutsche Bank and HSBC.

Among other things, IIROC expressed concern about the transparency. “Our review found that participants have a consistent working definition of Cdor… but certain aspects of the definition need to be clarified.”

For instance, some banks were submitting their base lending rate for BAs while others weren’t. On top of that, submitters were using different methodologies in their calculations.

“On the issue of transparency, there was no consensus among participants,” the review said. “[Participants] generally agreed that policy-makers should consider possible changes to the current calculation methodology and practice of publicly disseminating individual submissions.”

Seven months later Canadian regulators are still mulling over what to do.

“IIROC, the Bank of Canada, federal Department of Finance, and other Canadian regulators are meeting regularly to consider the implications for CDOR of the issues we identified in our review, and to develop recommendations for a course of action that is consistent with international guidelines and developments,” said Dale Alexander, a spokesman for the Bank of Canada. “Our work on this front is ongoing.”